It's Time for A Sensible Medicare Drug Policy

Members
of the Senate are trying to outdo each other in offering senior
citizens a prescription drug benefit under Medicare. In this
feverish process, many policymakers are drafting badly designed
legislative proposals that lack the serious structural reform
necessary to improve the Medicare program -- guaranteeing an
explosion of new costs that further jeopardizes the program's
future.

There is no disagreement about the need to integrate
prescription drug coverage into Medicare's benefit structure. Since
Medicare's inception, the pace of medical innovation has been
dramatic. There has been a revolution in the ability to diagnose
and treat illnesses, and much of that improvement has come from the
development of effective pharmaceuticals-true wonder drugs that can
extend and improve the lives of millions of people. But Medicare's
benefit structure has not kept pace with these improvements in
modern health care.

The national debate, then, is over the best way to deliver the
drug benefit. Instead of trying to craft a complicated and highly
regulatory Medicare drug program, Congress could give direct and
immediate assistance to those senior citizens most in need who do
not now have access to drug coverage, primarily those with lower
incomes. Congress could do this simply by combining a prescription
drug discount card with a generous federal subsidy to cover senior
citizens' routine drug costs, coupled with a plan to provide
private financial protection against the high drug costs facing
some seniors. This not only would solve the problem of senior
access to drug coverage, but also would be a crucial first step
toward Medicare modernization.

Why the Leading Senate Drug Proposals
Would Make Matters Worse

There is more at stake in the policy debate than simply making
pharmaceuticals more affordable for seniors. Decisions made about
the way that benefit is delivered can affect the nature of health
care in this country. Will patients and their doctors continue to
have an ability to choose the best medical treatment? Will
researchers find new cures and continue to develop new drugs with
fewer side effects to treat patients more effectively? Can the
Medicare program remain financially sound with the addition of an
expensive new benefit?

The Graham-Miller-Kennedy Proposal.
The prescription drug benefit proposed by Senators Graham (D-FL),
Miller (D-GA), and Kennedy (D-MA) raises precisely those questions.
Their bill proposes a massive government-controlled drug benefit
that is scheduled to end in 2010. This program sets drug prices for
seniors at $10, $40, or $60, and the federal government would pay
all costs once a beneficiary has used $4,000 worth of drugs. Unlike
other proposals, the stop-loss provision is triggered by a
beneficiary's total drug spending, not just the amount spent
out-of-pocket.

The proposed program would exacerbate Medicare's managerial
inefficiency and waste, and could drive the price of prescription
drugs to new heights. There would be little incentive for the
benefit administrators to drive a hard bargain for discounts from
pharmaceutical manufacturers since the government would pay them
dollar-for-dollar for the costs of the drugs. Drug prices are
likely to increase under this plan, since every dollar saved by the
administrators would reduce their payment by a dollar without
adding to their profits.

The Graham-Miller-Kennedy bill would likely cost taxpayers about
$650 billion over the next decade without the 2010 sunset
provision, making it the largest single benefit expansion in
Medicare's history. That estimate could, in fact, seriously
understate the program's true costs.

And for this, a highly diverse class of Medicare beneficiaries
would get a one-size-fits-all drug benefit. Premiums and benefits
would be uniform nationally, and beneficiaries would not be able to
select a less expensive drug plan. They would also have
first-dollar coverage, which would blunt any incentives for
efficient use of prescription drugs.

It is unlikely that the Senate could enact such a benefit
without resorting to price controls. Price controls and burdensome
regulation are virtually inevitable if-or when-Medicare's
prescription drug costs spiral even higher under the
Graham-Miller-Kennedy bill.

Congress was faced with just such a cost spiral 20 years ago in
Medicare Part B, the part that pays physicians. So Congress
established a complicated fee schedule that sets prices for more
than 7,000 individual physician services in all of the nation's
local markets, and imposed a cap on physician charges. In
implementing this system, the Medicare bureaucracy issued thousands
of pages of directives to doctors to regulate what they do and how
they do it as a condition for reimbursement. Meanwhile, not only
have Medicare physicians' payments been constrained under this
system, but doctors are also facing Medicare payment reductions.
And newly retired seniors are having difficulty finding a doctor
willing to see them.

Using this failed model in a financially troubled system for the
drug benefit would be a serious mistake. Government price setting
could distort market incentives, leading to shortages of particular
drugs. As costs would inevitably rise, access to the newest drugs
could be restricted. Such policies would discourage pharmaceutical
research and innovation to discover new cures and better medicines,
with serious consequences for everyone's health.

Why Alternative Senate Proposals Fall Short

Two other proposals under discussion in the Senate represent more
prudent approaches to a Medicare drug benefit. The Tripartisan
proposal offers a comprehensive drug benefit through competing
private prescription drug plans. A less costly proposal, sponsored
by Senators Hagel (R-NE), Ensign (R-NV), and others, would provide
drug discounts and federally sponsored catastrophic coverage. Both
of those bills contain elements that are positive, but they also
contain elements that are problematic and could lead to serious
problems for Medicare in the long term.

The Tripartisan Proposal.
The Tripartisan proposal requires that beneficiaries pay a
significant share of their prescription drug expenses, including a
$250 deductible and half of the cost of their prescription drugs
between $250 and $3,450. A benefit "hole" above $3,450 keeps
federal costs down. Once a beneficiary had spent $3,700 (counting
only out-of-pocket expenses), the federal government would pay all
costs. Like many other Medicare drug proposals, the Tripartisan
approach is somewhat complicated and is not easily explained to
seniors and other taxpayers.

The Tripartisan proposal adopts many of the market principles of
the House-passed bill, H.R. 4954, although it offers more generous
coverage and a lower monthly premium. Under both plans, competing
drug plans would have an incentive to manage costs and negotiate
favorable prices with pharmaceutical manufacturers. Plans would be
permitted to pass on the savings to beneficiaries through lower
premiums, which are expected to average about $30 a month in
2005.

The proposal would also establish a new fee-for-service option
that would give seniors both greater financial protection against
high medical expenses and additional preventive care benefits. That
new option would limit the total out-of-pocket costs paid by
beneficiaries for all Medicare services to $6,000 a year. It would
eliminate separate deductibles for hospital and physician services,
replacing them with a combined deductible of $300, and adjust other
cost-sharing requirements. Preventive services would be made
available without any cost-sharing requirements. Such changes would
improve the financial protection afforded to enrollees in the
enhanced program.

In addition, beleaguered Medicare+Choice plans would be given
somewhat greater flexibility than is now permitted. The
administered pricing scheme for those plans would be replaced by a
limited bidding system.

The Tripartisan bill's drug benefit would increase federal
spending by about $340 billion over the next decade. Other
enhancements to Medicare's benefits would require an additional $30
billion in federal spending.

The proposal would introduce some new elements of competition
into Medicare and provide additional incentives for more efficient
use of health care resources, but it doesn't go far enough toward
Medicare modernization. Although it is less expansive and more
economically efficient than the Graham-Miller-Kennedy proposal, the
bill would still impose substantial new costs on an already
over-burdened program. This level of spending would compromise
Medicare's long-term solvency without the aggressive new efforts
needed to reform the program.

The Hagel-Ensign Proposal.
Senators Chuck Hagel (R-NE), John Ensign (R-NV), and others
propose a catastrophic drug benefit that combines a discount
prescription drug card with catastrophic coverage. The bill,
estimated to cost $160 billion over 10 years, incorporates an idea
that mimics the President's discount drug card program to give
seniors access to privately negotiated discounts.

The bill also would provide catastrophic coverage triggered by
income and drug expenditures. For example, catastrophic coverage
would begin when out-of-pocket drug expenditure hit $1,500 a year
for those with incomes below 200 percent of poverty and $5,500 for
those between 400 percent and 600 percent of poverty.

But the taxpayers, not private entities, would bear the risk of
the catastrophic coverage. That means that the Hagel-Ensign bill is
a government drug benefit program that simply triggers at a higher
level. This is not real Medicare reform and does nothing to harness
free-market forces to keep drug costs down.

How the Senate Could Build On a Better Idea

Independent analysts, including those with the General
Accounting Office and the Congressional Budget Office, have
repeatedly advised Congress that a drug benefit should be crafted
within the context of serious Medicare reform. President George W.
Bush also has repeatedly expressed the Administration's support for
principles designed to inject competition and choice into the
Medicare program, based on a reform plan developed by Senator John
Breaux (D-LA) and Representative Bill Thomas (R-CA). That proposal
would give seniors the freedom to choose from among competing,
private health plans, just as federal workers and retirees do in
the Federal Employees Health Benefits Program (FEHBP). Those plans
would incorporate prescription drugs as an integral element of
their medical benefit packages.

As an interim measure, the President has proposed offering
Medicare-endorsed prescription drug discount cards to seniors.
Discount cards are already available to consumers from
pharmaceutical companies, retail pharmacies, drug benefit managers,
and health plans. Those cards often offer discounts of 10 percent
to 20 percent (or more) off the retail price. Under the President's
proposal, seniors would pay a fee to participate, much like a
buyer's club membership fee.

The President's discount card proposal, however, is flawed: It
would hand-select a few players from a limited field, and it has
predictably invited lawsuits by groups who say it is
anti-competitive and by pharmacists who fear the entire discount
will be drawn from their dispensing fees.

Creating a Drug Security Card.
A new drug benefit must include elements of broader program
reform, or it will endanger the financial stability of Medicare. An
innovative proposal called the Prescription Drug Security (PDS)
Card plan offers meaningful drug coverage to seniors most in need
while promoting efficiency, innovation, and consumer choice. It
also provides a way of testing market-based reforms that are key to
Medicare's long-term survival.

The PDS plan combines a drug discount card with a cash subsidy
for low-income people, a tax-deferred saving option for others, and
catastrophic insurance protection.

This plan would target immediate financial assistance to
low-income seniors to assist in purchasing routine medications
while also providing private catastrophic coverage for large drug
expenses.

Low-income seniors without drug coverage would get a PDS card
with $600 a year from the federal government to help them with
routine drug purchases and could roll over any balance to the next
year, when another deposit would be made. Seniors who did not
qualify for a low-income subsidy could make tax-deductible
contributions to a PDS account. All seniors enrolling in the
program would be protected by catastrophic coverage that starts
when their drug spending hits $2,000.

Seniors would be able to choose from among competing, private
plans that would track their card balances, negotiate discounts on
their behalf, organize the catastrophic coverage, and provide other
services to improve patient safety.

Efficient Administration.Administration of the PDS card program would be modeled after
the FEHBP. The administering agency would provide broad direction
to individual plans on required benefits and other policies,
negotiate with plans on their premium offers, and provide
information to Medicare beneficiaries on their options and the
performance of individual plans. Price controls and over-regulation
would be replaced with flexibility and a consumer focus.

The PDS plan would allow Congress to focus on seniors who lack
drug coverage and not disrupt the good coverage that millions of
others have now. This plan also would allow seniors and their
doctors to decide what drugs are best for them, and would actually
put in place a foundation for changes that could save Medicare in
the long run.

Conclusion

Congress should do the right thing for both senior citizens and
young working families who finance the bulk of Medicare costs.
President Bush has promoted a drug discount card without success,
but Congress can put resources behind it to target needy seniors
and make it work effectively. The Prescription Drug Security Card
could provide meaningful help for low-income seniors who do not
have access to drug coverage. These seniors should be the priority
for Washington policymakers, who can-and should-provide this help
while creating a framework for expanding drug coverage in tandem
with overall Medicare reform.

Joseph Antos,
Ph.D., is a resident scholar at the American Enterprise Institute and
most recently served at the Congressional Budget Office where he
directed analyses of Medicare prescription drug benefits and other
legislation. Grace-Marie Turner is President of the Galen
Institute, a not-for-profit health policy research organization
based in Alexandria, Virginia. Robert E. Moffit,
Ph.D., is Director of Domestic Policy Studies at The Heritage
Foundation. More details on the Prescription Drug Security Card
proposal are available at www.galen.org.

Share

President Bush has promoted a drug discount card without success,but Congress can put resources behind it to target needy seniorsand make it work effectively. The Prescription Drug Security Cardcould provide meaningful help for low-income seniors who do nothave access to drug coverage.

Rep. Peter Roskam (R-IL) says it's "a great way to start the day for any conservative who wants to get America back on track."

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